Time for Government to introduce pension auto-enrolment
With static pension saving rates, a new approach to encouraging pensions is needed
The nature of pension provision in the private sector has changed dramatically in the past decade
The Public Service Pay Commission report, published on Tuesday, provided a stark reminder of the differences in pension coverage between workers in the public and private sectors.
In the public sector, there’s 100 per cent coverage, albeit that those who took up employment from 2013 onwards have inferior terms. The €3.3 billion annual cost is mostly picked up by the exchequer.
In the private sector, the equivalent figure is just 40 per cent. The balance have to rely on the State pension in retirement.
The nature of pension provision in the private sector has also changed dramatically in the past decade.
The 2007 Benchmarking Body report referenced a study by the Irish Association of Pension Funds indicating that the share of companies with defined benefit (DB) pension provision was 37 per cent, with those offering defined contribution (DC) schemes at 24 per cent.
Fast forward to the 2015 annual report of the Pensions Authority and there were 125,955 active members of DB schemes and 281,629 with DC arrangements.
“Industry evidence strongly suggests defined benefit pension schemes are effectively closed for new entrants in the private sector,” the commission’s report states.
In 2014, an OECD paper found that private pension coverage here, both in occupational and personal pensions, was “uneven and needs to be increased urgently”.
It added that there was “unequal treatment” of public and private sector workers due to the prevalence of DB plans in the public sector and DC plans in private industry.
To stimulate improved coverage in private sector pensions, the OECD suggested four options: compulsion; soft-compulsion; automatic enrolment; and/or improving existing financial incentives.
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Compulsion was cited as the “less costly and most effective approach” while automatic enrolment was the “second-best option”. Auto-enrolment involves people being automatically signed up to a pension scheme and having to actively opt out of such an arrangement.
“Its success depends on how it is designed and on its interaction with incentives in the system,” the OECD said, adding that existing private schemes need to be subject to the same rules as the new schemes under auto-enrolment or compulsion.
The Government has since plumped for auto-enrolment as its preferred option, although it has yet to come forward with a fully-fledged plan.
“The big attraction of auto-enrolment is that it kick-starts people and forces them to make the start,” he said. “It takes away the procrastination. The countries that have introduced it have found no negative reaction to it. People know they have to save for retirement.”
This view was supported by the findings of a report published late last year by State Street Global Advisors.
The Retirement Confidence Monitor, which tracks attitudes to savings in DC pension plans in the US, the UK and Ireland, found that 80 per cent of respondents here favoured a scheme where they would be automatically enrolled in a pension when they take up a job. Just one in 10 thought it was a bad idea.
And more than 60 per cent said they would back a scheme that would automatically increase their contributions to such a scheme every year.
However, many employers, mostly SMEs, oppose auto-enrolment, citing the costs and complexities of managing such a scheme.
Auto-enrolment was introduced in the UK in October 2012. By the end of March 2016, more than 6.1 million workers had been successfully enrolled, an increase of nearly 1 million on a year earlier.
Some 110,103 employers had been through the whole process, including 59,985 small and micro businesses.
Automatic enrolment is helping to turn around a decade-long decline in pension provision in the UK, with 66 per cent of all employees now active members of a scheme, compared with 47 per cent in 2012.
In Ireland, efforts to encourage people to save for their retirement have focused on tax incentives. The result is that coverage levels have been largely static over the years.
With people living longer lives, the viability of the State pension is seriously in question and the time is ripe for the Government to bite the bullet and introduce an auto-enrolment scheme.
The department of social protection told me that this is in the final stages of preparation. “The Minister [Leo Varadkar] has confirmed his intention to publish and commence a plan for the reform of pensions in the next few months. This will include measures required to deliver an auto-enrolment defined contribution retirement savings system for working people,” it said in a statement yesterday.
That said, Irish Life’s Harney told me yesterday that it was still some time off. “There’s consensus and support building for it but the details will still take a couple of years to work through,” he said.
Sorting out a pension is no fun but it’s hugely important in the long-run for all workers. The State has an obligation to provide a framework for private sector workers to save for their retirement in a simple and cost-effective way.
It’s also a no-brainer for the Government given that a retiree with their own pension would be less financially dependent on the State in their dotage.